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The Welfare Gains of Improving Risk Sharing in Social Security

Listed author(s):
  • Olovsson, Conny

    ()

    (Institute for International Economic Studies, Stockholm University)

This paper shows that improved intergenerational risk sharing in social security may imply very large welfare gains, amounting to up to 15 percent of the per-period consumption relative to the current U.S. consumption. Improved risk sharing raises welfare through a direct effect, i.e., by correcting an initially inefficient allocation of risk, and through a general equilibrium (GE) effect. The GE effect is due to the fact that the allocation of risk in the pay-as-you-go system influences the demand for capital. As a result, with an efficient risk sharing arrangement, the crowding out effect associated with an unfunded system can actually be completely eliminated. Efficient risk sharing in social security implies highly volatile and pro-cyclical benefits, i.e., that retirees' exposure to productivity risk is increased. Consequently, a policy involving completely safe benefits will unambiguously be welfare reducing.

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File URL: http://su.diva-portal.org/smash/get/diva2:343979/FULLTEXT01
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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 728.

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Length: 29 pages
Date of creation: 10 Mar 2004
Handle: RePEc:hhs:iiessp:0728
Contact details of provider: Postal:
Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden

Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

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  13. Bohn, Henning, 1998. "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series qt9r2809f0, Department of Economics, UC Santa Barbara.
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